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The Impact of Foreign Portfolio Flows on Emerging Market Volatility: Evidence from Thailand

Author

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  • Pantisa Pavabutr

    (Department of Finance, School of Business, Thammasat University, Bangkok 10210, Thailand.)

  • Hong Yan

    (Department of Finance, Moore School of Business, University of South Carolina, Columbia, SC 29208.)

Abstract

We conduct an analysis of the impact of foreign portfolio flows on the volatility of emerging markets, using a unique dataset consisting of aggregate daily trading by foreign investors in the Thai stock market between 1995 and 2002. We find that the effect of foreign flows on the volatility of daily and weekly returns in the market comes primarily from the unexpected shocks to foreign flows. The predictable component of flows, which is attributable to positive feedback trading, has a negligible impact on the local market volatility. Our analysis reveals that the extraordinarily high volatility during the Asian financial crisis is associated with domestic selling, as foreign investors are net buyers, and thus liquidity providers, during that period. Moreover, foreign flows also play an instrumental role in promoting market liquidity.

Suggested Citation

  • Pantisa Pavabutr & Hong Yan, 2007. "The Impact of Foreign Portfolio Flows on Emerging Market Volatility: Evidence from Thailand," Australian Journal of Management, Australian School of Business, vol. 32(2), pages 345-368, December.
    • Handle: RePEc:sae:ausman:v:32:y:2007:i:2:p:345-368
    DOI: 10.1177/031289620703200209
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    Cited by:

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    2. Amar Singh & Arvind Mohan, 2020. "An Empirical Model of Indian Foreign Investment and Stock Market Volatility: Evidence From ARDL Bounds Testing Analysis," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(2), pages 154-162, April.
    3. Isaac L. Ochieng’ & Tobias O. Olweny & Oluoch J. Oluoch & Gordon O. Ochere, 2019. "Effect of foreign equity flows on stock market volatility in Kenya Empirical evidence at Nairobi securities exchange," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 8(3), pages 1-5.
    4. Angelovska Julijana, 2020. "The Impact of Foreigners’ Trades on Equity Prices: Evidence from Macedonian Stock Exchange," South East European Journal of Economics and Business, Sciendo, vol. 15(1), pages 56-65, June.
    5. Robert E. Marks, 2007. "The Old Order Changeth," Australian Journal of Management, Australian School of Business, vol. 32(2), pages 0-3, December.
    6. Gonçalves, Walter & Eid, William, 2017. "Sophistication and price impact of foreign investors in the Brazilian stock market," Emerging Markets Review, Elsevier, vol. 33(C), pages 102-139.
    7. Mehmet Umutlu & Levent Akdeniz & Aslihan Altay-Salih, 2013. "Foreign Equity Trading and Average Stock-return Volatility," The World Economy, Wiley Blackwell, vol. 36(9), pages 1209-1228, September.
    8. Yue Meinn GOH & Ros Zam Zam SAPIAN, 2017. "Return, Volatility And Fund Flows Linkages: Malaysian Evidence," Management and Marketing Journal, University of Craiova, Faculty of Economics and Business Administration, vol. 0(2), pages 59-69, November.

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